The Blame Game

Let the debate begin. You know which debate, the debate over whether wokeness caused the failure of the Silicon Valley Bank. Many commentators, including your humble blogger, have pointed out that the SVB was more woke than thou, and thus, that its environmentally friendly policies, mixed with its mania about diversity and inclusion filled the board of directors with people who did not understand banking.

And one feels compelled to notice, as reported in the Financial Times yesterday, that the bank’s leading executives were working remotely. Besides, the bank was not just making environmentally friendly loans, but, would you believe, it was long on empathy and short on banking acumen.

And then there is Mary Daly, the Fed official responsible for overseeing SVB. It was not merely that SVB did not have a risk management executive, but it had the seriously incompetent Daly overseeing the bank.

The New York Post reports on Daly’s inadequacies and disqualifications:

Daly has no background in banking or managing risk. After dropping out of high school, she worked in a donut shop before eventually getting her GED and entering college, where she became enamored with a socialist professor.

She said she was inspired by Marxian economist Gene Wagner, who “has mentored me my whole life.”

Several years later, after earning a PhD from Syracuse University, Daly landed a job as a labor inequality researcher at the San Francisco Fed, where she ingratiated herself with then-SF Fed President Janet Yellen, who helped her fail upward.

So, if you ask who was running the asylum, you will discover that the executive class was often chosen for reasons of diversity and inclusion.

Writing in the Wall Street Journal Kimberly Strassel points out that Mary Daly was more concerned with fighting against climate change than she was in the risks of bank failures.

Strassel explains the aberrant banking practices that brought SVB to its knees. 

Rather, as the Journal reported, SVB was beloved for its willingness to offer “banking services to startups that often weren’t profitable, in some cases didn’t have a product, and would otherwise have a hard time getting a line of credit or a loan from a larger bank.” One tech entrepreneur provided law.com a more scathing description of SVB’s products: “They’re basically subprime business loans. You’re talking about companies that have no credit profile, they’re burning cash and are unlikely to raise the same type of capital because of interest rates. . . . It was basically social credit.”

And this preceded the bank’s unfortunate investment in government bonds.

What inspires a bank to disregard risk and shower money on products or services that nobody is clamoring to buy? One answer is easy money and misguided regulation, which washed dollars into the economy even as it pushed banks like SVB to load up on sovereign debt, lulled by a Federal Reserve-fed belief that interest rates would stay near zero forever. The other? Washington handouts, via President Biden’s effort to engineer a climate industry that otherwise wouldn’t exist.

And then there was the Biden infrastructure bill. Note the impact of this bad legislation:

Congress’s $1.2 trillion 2021 “infrastructure” bill was a starting gun for a clean-tech frenzy. The bill made available hundreds of billions for new “technologies” for electrical grid modification, solar, carbon capture, battery storage, electric-vehicle charging infrastructure, geothermal, “smart community” widgets, microgrids, CO2 transport, hydro, wind, fuel cells, waste management and efficiency gains. Last year’s so-called Inflation Reduction Act threw yet more dollars at would-be green innovators, while also extending billions in household tax credits in an attempt to lure Americans to buy these government-fueled concoctions.

The Biden bills were a supercharged version of Barack Obama’s 2009 stimulus, which produced Solyndra’s federal loan guarantees and other green embarrassments. Yet Washington is adept at repeating mistakes. The feds did this time largely off-load responsibility to the state and local authorities or industrial players that apply for grants and pass the money on from there. But the message was still the same: A honey pot of hundreds of billions sits waiting to be taken. Cue the clean-tech scramble.

In short, SVB had been loaning money to subprime environmentally friendly firms. It was counting on the government to backstop its loans.

Strassel even suggests that the Biden administration was happy to bail out SVB because it was making environmentally sensitive investments. This means that the government has chosen to insure deposits well over the $250,000 limit because it wants to save the planet. She adds that if the bank had been financing oil drilling, the outcome would have been quite different.

More than a few economists and bankers are horrified at the prospect that the government has nationalized risk in the banking system. We will see how this develops. I cannot link to the Financial Times, but it did report yesterday that European banking regulators are enraged and incensed over the way the crisis at SVB has been handled. Covering all deposits, even those that had not been insured by the government strikes them as a very, very bad idea.